Residential property update

For those of us undertaking residential conveyancing, the Chinese curse about living in interesting times seems particularly apt. Barely a month passes by without some government initiative to address the stagnant residential property market.

In a measure aimed at giving the lower end of the property ladder a boost, the government introduced a scheme to lift transactions out of the SDLT where the value of the property is less than £250,000. The temporary exemption, often referred to as the ‘SDLT holiday’, meant that buyers were free from paying any stamp duty on homes costing less than £250,000. But this incentive came to an end on 24 March 2012 and buyers now face a tax of one per cent on house purchases between £125,000 and £250,000, and a three per cent on purchases ?over £250,000.

SDLT avoidance

It seems that SDLT is a current hot topic, and, on 16 February 2012, the SRA joined the debate by issuing a warning notice to all conveyancers involved with, or considering becoming involved with, SDLT schemes. The schemes are designed to reduce or eliminate the level of stamp duty payable upon purchasing a property and are not illegal. However, the SRA has taken an aggressive stance in relation to these schemes, particularly to residential ?property transactions.

There has been rhetoric about the notice being put in place to protect solicitors. Warren Gordon of the Law Society said: “Practitioners have been pressured by third parties and clients to become involved in schemes that they felt were not legitimate, otherwise they may lose the conveyancing work.” However, one suspects that the real issue here is loss of revenue to HMRC.

Practitioners are consequently being warned that it may not be possible to comply with the principles in the SRA handbook if advising on these schemes. Furthermore, the SRA is “likely to look very closely at the conduct of any firm that is actively involved in these schemes” and is “taking action in a number of cases”. Solicitors may at this stage begin to ?feel somewhat less protected and a bit ?more threatened.

Given the heavy-handed stance adopted by the SRA, many law firms may decline to advise clients on ways to save on SDLT – even if it is perfectly legal to do so – especially as the SRA has traditionally relied on warnings as evidence in support of disciplinary actions.

Critics have questioned why, given that the schemes are legal, any loss to HMRC should be a relevant consideration for a regulator. Loopholes in the statutes are a matter for parliament to address, should it wish to do so, not the SRA.

First-time buyers

On 12 March 2012, the government launched its NewBuy Guarantee initiative to boost the first-time buyers’ market. Under the scheme, the government guarantees ?part of a homebuyer’s mortgage, allowing them to take out much larger loans than they might otherwise be eligible for – typically with buyers putting down a five per cent deposit and taking on a 95 per ?cent mortgage.

According to the government, the average age of a first-time buyer is now 37 in some parts of the UK. The new scheme seeks to redress this by unblocking the housing market and enabling an otherwise lost generation to get a foot on the property ladder. It is purported that the scheme will be able to assist up to 100,000 households in buying a new home.

Under the NewBuy scheme, developers will put 3.5 per cent of the sale price into an indemnity fund for each property sold with the government providing an additional security for the mortgage loan in the form of a 5.5 per cent guarantee. In the event of repossession, the lender will be able to recover any losses to the maximum covered by the borrower’s deposit and the developer’s fund, and then call on the government guarantee.

In the absence of a claim, developers can recover their contributions after seven years. Importantly, every party seems to be protected under this scheme except, of course, the borrower.

So far, Barclays, Nationwide and NatWest are participating in the scheme, and other lenders are expected to follow. Anyone wanting to take advantage of the scheme will be subject to the following ?eligibility criteria:

1. the price of the property must be less than £500,000;

2. the transaction must be a standard purchase – not shared equity or shared ownership;

3. the property must be the applicant’s main home – not a second home or ?a buy to let investment; and

4. the applicant must be UK citizen, ?or have indefinite leave to remain in the UK.

And, of course, the all-important consideration: the property must be newly built by an approved developer (including Barratt, Bellway, Bovis, Linden Homes, Persimmon, Redrow and Taylor Wimpey).

Because of this last consideration, critics have argued that the scheme is simply a ruse to help the construction industry and does not seek to benefit the first time buyer at all. The traditional property ladder is exactly that – a ladder whereby first time buyers enter on the first rung and purchase, for example, a two-bed property. The previous two-bed owner moves up a rung to a three-bed, the three-bed to the four-bed and so on. However, if first-time buyers are purchasing new-build properties, then there is no upwards progression on the ladder. In other words, encouraging first time buyers to buy new builds fails to stimulate the property market overall.

There are additional concerns that, in a fluctuating and unpredictable market, small deposits, such as five per cent, could result in homeowners experiencing negative equity should the value of their home fall a mere five per cent. The Council of Mortgage Lenders (CML) has expressed similar concerns, warning that some new-build properties include an extra premium on the sale price that can reduce as soon as someone moves into the property.

Right to buy discount

There has also been movement in the social housing sector in terms of encouraging first-time buyers onto the property ladder. Margaret Thatcher’s ‘right to buy’ scheme has been brought back to life to encourage social tenants of local authorities in England and Wales to buy their council home at a discount.

From 2 April 2012, the maximum discount available for tenants has been increased from £16,000 to £75,000 with the exact level of discount dependent ?on the how long applicants have lived ?in the property.

For houses: those who have lived in the property for at least five years will be entitled to a discount of 35 per cent of its value, plus an extra one per cent for each additional year they have lived there – up to a maximum of 60 per cent subject to a maximum discount of £75,000.

For flats: tenants will be offered a discount of 50 per cent after five years of occupancy with an extra two per cent for each extra year they have lived there – up to a maximum of 70 per cent subject to a maximum discount of £75,000.

The government has suggested that the proceeds of all sales will be put towards building more properties for the social housing stock. However, there are clear constraints on the ability to build more housing when there is not enough available land to do so.

Given that social housing providers already struggle with a limited housing stock and an ever-growing waiting list, it could be argued that the scheme serves nothing more than to rob Peter to ?pay Paul.

Various attempts to restart the property market have been introduced this year, and, at first blush, many of them are commendable. However, upon detailed consideration, these solutions could only ever succeed on a short-term basis

There is a danger that the UK is sleepwalking into a housing crisis and sooner or later the government will be forced to come up with something approaching a housing strategy.